Answer to the Question sent by Ripon Sarkar to IAS Study Room

With respect to hike in petroleum prices, as you said,the opposition parties have argued that "If the cess revenue earned by the government due to rise in international crude prices is returned to the oil companies, then there would be no need to hike prices and burden the aam aadmi". But there is a fallacy.
The market price of petrol consists of
Price of petrol at retail point= Cost of crude oil+Refinery cost+Cost of transport as crude and as refined oil+operating profits of oil marketing companies, including commission to petrol pump owners+central excise ad valorem+state VAT ad valorem+Cess of central and state governments,if any.
India imports nearly 80% of the crude oil it uses - more than 60% from the Middle East. The price of crude oil varies widely in the international market due to speculation. Although cost of crude oil is the most significant part of petrol price, taxes are no less significant. Taxes and cess contribute to nearly 40%--45% of market price of petrol. The state government gets the major portion of this tax revenue. They have never reduced this, except once in the early part of this year.

Taxes are not imposed on petrol prices in any developed country, except UK. But in India this is the most common and sure way to raise revenue.It is collected at the point of sale every day. Thus, there is a regular flow of revenue form the petroleum products.

Cess is additional taxes, imposed for a specific purpose, say for development of road. Thus this revenue can not be transferred to Oil companies. What state governments and central government can do is to reduce the the rate of advalorem tax,in proportion to rise in crude prices so as to keep market price of petrol unchanged. But this would mean a loss of revenue and that too in a uncertain way. This may affect budgetary process in a great way.
My opinion is taxes should not be fully removed but can be moderated. India should try to achieve a global consensus for a controlled speculation with crude price, with floor price and a ceiling price.

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SM